Bloomberg News

RBA’s Stevens Seen as Only Banker Cutting Rate: Australia Credit

April 03, 2012

Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Ian Waldie/Bloomberg

Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Ian Waldie/Bloomberg

Reserve Bank of Australia Governor Glenn Stevens led the world in tightening policy after the 2009 financial crisis. Now he will go it alone again by being the only central bank chief among developed nations to cut interest rates in the coming year, credit markets show.

The RBA will lower its overnight cash-rate target by 75 basis points within 12 months, swaps show. New Zealand will tighten policy and eight other central banks are expected to hold their stances, Credit Suisse Group AG indexes show.

Stevens signaled yesterday a willingness to cut rates after the RBA board “judged the pace of output growth to be somewhat lower than earlier estimated.” He held the benchmark at 4.25 percent, the highest among major advanced nations. Three-year bond yields dropped to the lowest in two months, as China’s plans to slow output and Treasurer Wayne Swan’s pledge to cut spending by a record feed concern Australia’s economy will struggle to rebound after weakening at the end of 2011.

“The RBA’s statement was a shift in the dovish direction,” said Gavin Stacey, chief interest-rate strategist at Barclays Capital in Sydney. “By toning down the growth outlook for both China and Australia, they’re moving in the direction of easing. The door is open for rate cuts.”

RBA policy makers held the overnight cash-rate target unchanged for a third-straight meeting after lowering it in November and December amid Europe’s debt crisis. The result was predicted by all 24 economists surveyed by Bloomberg News.

‘Somewhat Lower’

“The board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy,” Stevens said yesterday in a statement.

The statistics bureau is scheduled to report first-quarter inflation data on April 24. Three-year bond yields slid eight basis points to 3.44 percent yesterday, the lowest closing level since Feb. 6.

The three-year swap rate, an indicator of the cost to lock in fixed rates, dropped three basis points to 4.05 percent yesterday. The rate is a “good predictor” of the average cash rate over the next three years, George Boubouras, Melbourne- based head of investment strategy at UBS AG’s Australian wealth- management unit, wrote in a report yesterday before the RBA announcement.

Traders expected as little as 38 basis points in borrowing- cost reductions on March 15, the least in seven months, a Credit Suisse index shows. New Zealand’s key rate is now forecast to rise 25 basis points. The U.S., U.K. and European central banks are all likely to keep rates unchanged in the coming year, as are policy makers in Japan, Canada, Norway, Sweden and Switzerland, according to Credit Suisse.

Bond Losses

Australian federal debt declined 0.5 percent in the three months through March 31, the first drop in five quarters, after gaining 14 percent in 2011, according to an index from Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries (USGATR) fell 1.3 percent last quarter, while German bunds advanced 0.3 percent, separate gauges show.

Australia’s 10-year yield dropped seven basis points to 4.06 percent yesterday, or 186 (GACGB10) basis points more than U.S. government notes. Benchmark borrowing costs declined in each quarter of last year, the longest stretch since the period that started in April 1, 1997, and ran to Sept. 30, 1998.

Investors Preparing

The rally in Australian bonds indicates investors are preparing for a rate reduction next month, said Roger Bridges, who oversees the equivalent of $15.6 billion of debt as the Sydney-based head of fixed income at Tyndall Investment Management Ltd., a unit of Nikko Asset Management Co.

“The market keeps pricing in more and more cuts,” he said.

Elsewhere in Australian credit markets, the extra yield investors demand to buy corporate bonds instead of government debt was at 252 basis points on April 2 after dropping to 244 on March 22, the smallest premium since Oct. 17, according to Bank of America Merrill Lynch indexes.

The gap between rates on Australian government bonds and inflation-linked debt shows traders expect a 2.68 percent annual advance in consumer prices over the next decade, down from a seven-month high of 2.92 on March 19.

Aussie Dollar

The so-called Aussie dollar, the world’s fifth-most traded currency, fell 0.2 percent to $1.0394 as of 6 p.m. yesterday in Sydney. The currency climbed 53 percent over the past three years and reached a post-float high of $1.1081 on July 27, as a A$456 billion ($473 billion) pipeline of resource projects spurs companies such as BHP Billiton Ltd. to increase investment.

The RBA statement stopped short of promising a May cut, said Bin Gao, the head of rates research in Hong Kong for Asia and the Pacific at Bank of America Merrill Lynch.

“The market was expecting the RBA would signal an easing bias, but they didn’t really mention that,” Gao said. “It doesn’t signal an immediate easing. They’re still looking for evidence for the economy to weaken.”

The Aussie’s climb has hurt industries from tourism to manufacturing and education by reducing their capacity to compete against overseas rivals.

Losing to Austria

The local dollar’s advance “has made it essentially impossible for any of our non-resource, trade-exposed sections of the economy to be profitable,” Paul Howes, national secretary of the Australian Workers Union, said in an interview last week. The union official said the chief executive officer of a major manufacturer told him the company had lost one of its most significant contracts to make consumer goods to Austria.

BlueScope Steel Ltd. (BSL), the country’s largest steel producer, in August shuttered its export division. Toyota Motor Corp. and General Motors Co. have cut jobs in Australia this year, citing the currency’s strength.

Australian retail sales climbed in February, matching economist forecasts for a 0.2 percent increase, the Bureau of Statistics said in Sydney yesterday. In the same period, the number of permits granted to build or renovate houses and apartments sank 7.8 percent, the biggest drop in four months, according to an April 2 report.

Weak Labor Market

Employers unexpectedly cut payrolls by 15,400 in February, figures last month showed. Even amid a record resources bonanza, Australia experienced the weakest labor market in 19 years, with employers adding no jobs in 2011.

The unemployment rate climbed in February to 5.2 percent, the first increase since August. Fourth-quarter gross domestic product expanded 0.4 percent, slowing for a second-straight period, according to data released March 7.

An uneven economic recovery is boosting concern Australia’s budget surplus goal for the year beginning July 1 will damp growth prospects.

The government has been forecasting a A$1.5 billion ($1.56 billion) surplus in the 2012-13 financial year from an expected A$37.1 billion deficit this year. Swan is due to hand down the budget on May 8, a week after the next RBA meeting.

A budget in surplus “ensures that we won’t be adding to the price pressures,” Swan said in his economic note April 1. “This in turn provides more flexibility for the Reserve Bank to cut interest rates if they think this is warranted.”

The government’s plans for the largest spending reductions Australia has ever seen is likely to weaken the economy, said Stephen Walters, JPMorgan Chase & Co.’s chief economist in Australia, said in a research report.

“While we believe the quest to return the budget to surplus next year ultimately will fail, the government’s attempt to fulfill its promise will drag on growth,” Sydney-based Walters wrote. “The pain in key domestic sectors may become so acute that the RBA is forced to act to underpin demand.”

To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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